Popular electric vehicle SPACs have a lot to prove as some expect the bubble to burst

Published Wed, Aug 26 202010:41 AM EDTUpdated Wed, Aug 26 202010:55 PM EDT

Key Points

Electric vehicle startups such as Nikola are turning to blank check firms, also known as Special Purpose Acquisition Companies, or SPACs, as a way to go public and raise an influx of fast cash.
Following Nikola going public in June, at least three other aspiring automakers – none have actually produced a vehicle for sale – have announced similar deals.
More than 50 SPAC offerings were completed this year through July raising more than $21.5 billion, up 145% from the same period a year ago, according to Goldman Sachs.

(We're interested in hearing from our PRO subscribers on what EV startups they are trading. Click here to rate them .) Electric vehicle startups such as Nikola are turning to blank check firms, also known as Special Purpose Acquisition Companies, or SPACs, as a way to go public and raise an influx of fast cash to get their vehicles to market. All the companies have grand ambitions and believe they can create a niche in the market. Some have charismatic executives on social media, taking a note from Tesla CEO Elon Musk's playbook. And a few even have factories under construction. But one thing they all have is a lot to prove amid what some are expecting to be an electric vehicle SPAC bubble on Wall Street. Following Nikola going public and shares surging in June, at least three other aspiring automakers – none have actually produced a vehicle for sale – have announced similar deals. They include: Fisker, Lordstown Motors and Canoo . Other auto-related companies such as Hyliion, an electrified powertrain trucking company, also have announced similar plans. "I think a lot of these firms won't make it, but they'll linger around for quite a while and right now there's easy money," said Morningstar analyst David Whiston. "The SPAC model is putting gasoline on that fire." A SPAC is a company formed to raise funds to finance a merger or acquisition within a certain time frame, typically two years. The target firm will be taken public through the acquisition, supplying an influx of cash faster than a traditional roadshow and initial public offering. From a portfolio manager's perspective, investing in SPACs offers upside potential with downside protection, according to a recent investor note from Goldman Sachs . "Ultimately, the upside potential is a function of the sponsor's ability to identify the target, negotiate terms, inject needed external capital, and create long-term value," the firm said. The limited downside is a redemption option that allows investor to pull their capital back. Many have combined the mergers with private investment in public equity, or PIPE, deals. SPACs underperform The electric vehicle startups, including Nikola, are attempting to replicate the success of Tesla – the industry's electric vehicle leader. As shares of Tesla surged this year to be up more than 380%, investor interest in electric vehicle startups increased alongside SPAC deals, creating a perfect entry into the market for the companies. More than 50 SPAC offerings were completed this year through July raising more than $21.5 billion, up 145% from the same period a year ago, according to Goldman Sachs. But the bank found that while the companies tend to get an initial pop after the deal announcement, they tend to underperform the broader market in the long run. CNBC's Jim Cramer earlier this month said he believes Wall Street's craze for electric vehicle stocks other than Tesla is coming to an end. The "Mad Money" host said the segment "looks like a boom, and then more like a bubble, one that's already started to burst." The SPAC electric vehicle startups face tough competition from Tesla as well as traditional automakers such as General Motors that are investing billions in electric vehicles. They also are behind private electric vehicle startups such as Rivian – viewed by many Wall Street and auto analysts as being a frontrunner of EV startups. "One of the risks for the special acquisition company startups and going public is they're entering a more competitive environment maybe than they even realize," said Stephanie Brinley, principal automotive analyst at IHS Markit . "Simply being new to the market is not going to be enough to get consumer interest and consumer demand. You're going to have to find another way to make that connection." Nikola board member Steve Girsky, a former vice chairman of GM and managing partner of VectoIQ, which entered into a SPAC deal with Nikola , expects the SPAC trend to continue on Wall Street amid low interest rates, unstable economy and rise of retail investors. "It started with EV companies and you're going to see it move to infrastructure and components companies," he said Monday during CNBC's "Squawk Box." He said the amount of electric vehicle companies has been "surprising." VectoIQ also is an investor in Luminar, an autonomous vehicle technology startup, that announced plans Monday to merge with Gores Metropoulos , a SPAC, in the fourth quarter. The deal values the company at about $3.4 billion. Fast cash Lordstown Motors CEO and founder Steve Burns said his company decided on a SPAC deal following funding in the private sector slowing due to the coronavirus pandemic. It was quicker than a traditional initial public offering and provided more capital. "Covid really slowed down the fundraising," he told CNBC. "We raised a lot more in the SPAC transaction than we were planning … It's fantastic for us." Lordstown announced a definitive merger agreement Aug. 3 with DiamondPeak Holdings Corp. The deal is expected to close in the fourth quarter and values the electric pickup truck startup at $1.6 billion. The company expects to receive about $675 million of gross proceeds from the deal and will use the funds for the production of a new truck called the Endurance. Lordstown says it has secured $1.4 billion worth of pre-orders. The company plans to produce the pickup beginning late next year at GM's former Lordstown Assembly plant, which it purchased from the automaker last year. "It seems like the deals are for the taking right now, which is why everybody is jumping on it trying to get funding," said Jeff Schuster, LMC Automotive president of the Americas. "It's all about having enough money to get through the development cycle and get to launch." Henrik Fisker, CEO and founder of Fisker, said he felt a SPAQ deal was "the best way" in the automotive industry to raise capital after Nikola's success. "It came together really quickly," he said earlier this month during CNBC's "Squawk on the Street." "I really feel this is the best way, specifically in the automotive world." If Fisker sounds familiar, it should. Fisker, a well-known auto designer, started a namesake auto company in 2007. It filed for Chapter 11 bankruptcy protection in 2013 after its Karma sedan, a plug-in hybrid vehicle, failed to garner sales. Fisker last month announced it would go public through a merger with a company backed by private equity firm Apollo Global Management with a combined value of $2.9 billion. Outsourcing manufacturing One way some SPAC-merged companies plan to cut costs and get to market is to share resources, including production. It cuts costs but also narrows profits and relinquishes control of production quality to a third party. Fisker plans to outsource its manufacturing and share hardware with other automakers to assist with expenses. However, a planned partnership with German automaker Volkswagen has already hit snags. Nikola, which is concentrating on electrified commercial trucks, including hydrogen fuel cell vehicles, ahead of an electric pickup truck for consumers, also plans to outsource the production of its Badger pickup to another manufacturer. "Nikola brings the innovative design and technical know-how and our partners have decades of experience and facilities ready to manufacture products," Nikola Executive Chairman Trevor Milton, said in a statement to CNBC. "We will get our products to market faster by working together. Everybody wins…especially the customer." The company is in a partnership with CNH Industrial's Iveco on production of the Nikola Tre semi-truck in Germany. Nikola recently broke ground on a $600 million facility in Arizona for its own production of the Tre truck as well as another semi-truck. Nikola CEO Mark Russell told investors Aug. 5 that the company needed a partner for the Badger because such a vehicle wasn't initially in its product plans. A partner, he said, would assist in bringing the vehicle to market and take on some of the risk in doing so. "That's our model. If we're facing a big challenge with lots of risk, we're looking for partners and help," he said during the company's second quarter investor call. "And so we said we'll look for a partner. And we've got lots of people who were interested in partnering with us." Milton has promised to announce a production partner this year. Milton has said production of the vehicle, despite not having an agreement, is set to start in 2022 or earlier. He has said the company has term sheets from three automakers for a partnership. Shares of Nikola more than doubled during their first week of trading to about $94 before falling off to around $39, up about 16% since its June 4 debut. The company's market cap is about $14 billion. Peter Rawlinson, an auto veteran and CEO of EV startup Lucid Motors , balked at any company, including his California-based startup, outsourcing its manufacturing. "Why would you trust a third party who's not equally incentivized for success," Rawlinson told CNBC. "If I were to do that, supposing I could find a third party who could do that for me, would I be prepared to risk the fortunes of Lucid motors on the competence of tat third party? Absolutely not. Call me a control freak if you'd like, but I take full responsibility in my job to execute this product." Lucid, like Rivian , raised capital in the private market instead of a SPAC deal. The company hit production as well as funding delays before receiving $1 billion from Saudi Arabia's sovereign wealth fund in 2018. Both Lucid and Rivian expect to begin production and customer deliveries next year. Canoo, an electric vehicle subscription company, last week announced a definitive agreement on a merger with Hennessy Capital Acquisition Corp. , a SPAC. The transaction is valued at $2.4 billion and is slated to close in the fourth quarter of 2020. It's expected to raise about $600 million into Canoo to support its production and launch of electric vehicles. Limited market While there's massive investor interest in electric vehicle startups, there's still little actual demand from consumers to purchase the vehicles. Electric vehicle sales were only about 1.5% of the more than 17 million vehicles sold in the U.S. last year, according to the Transportation Research Center at Argonne National Laboratory. Despite an expected influx of new electric vehicles being released in the coming years, IHS Markit forecasts electric vehicle sales will only be 8%, or 1.3 million, of the U.S. market in 2025. "Consumer acceptance in terms of EVs is still pretty low," IHS Markit's Brinley said. "There's plenty of opportunity but it's going to take time to get there." Time isn't something Wall Street has given to automakers. It wasn't long ago that there were talks of whether Tesla would make it. And many of the electric vehicle SPACs, which haven't produced a vehicle, will be playing catch up to Tesla if they manage to even get that far. "Until they're on the market, available and producing and selling vehicles, I think they're all still a question mark for the most part," LMC Automotive's Schuster said. – CNBC's Yun Li contributed to this report.